He had a girlfriend who did not want a relationship with him and doesn't want a child too. Then she leaves him with the child. He also views the child as his sperm throughout the movie to the point that he also views himself as a sperm cell.

So having nightmares/hallucinations continues throughout the film until he decided to kill himself and his baby with a scissor dissecting it in the process then impaling the lungs or heart to kill it. He also imagined that his knowledge about making erasers could help a boy earn money if ever a boy could get the knowledge in his mind and give it to a company of pencils.

THIS MOVIE IS A CLUSTER*bleep*! Even the creator was not so sure about what it meant yet it gave everyone nightmares due to its weirdness.

SHEESSHHH I can't sleep... "In heaven... Everything is fineee...." This song haunts me